Gold stands firm near one-week high on softer USD; remains below $4,100 amid Fed hike bets
- Gold catches fresh bids during the Asian session on Tuesday, though the upside seems capped.
- Inflation fears bolster Fed hike bets, which support the USD and should cap the precious metal.
- US-Iran tensions also favor USD bulls and warrant caution before positioning for additional gains.
Gold (XAU/USD) hits a one-week high during the first half of the European session on Tuesday, albeit it lacks follow-through buying and remains below the $4,100 mark.
Despite persistent military confrontation between the US and Iran, investors remain hopeful about a diplomatic resolution to the conflict. In fact, US Secretary of State Marco Rubio maintains that Washington remains open to a diplomatic solution with Iran. This undermines the US Dollar's (USD) reserve currency status, which, in turn, is seen as a key factor benefiting the commodity.
Investors, however, remain worried about energy-driven inflation, which could force the US Federal Reserve (Fed) to stick to its hawkish stance and support the USD. In fact, restricted traffic through the Strait of Hormuz has caused significant disruptions to global oil supplies. Adding to this, Yemen's Iran-aligned Houthis announced a maritime blockade against Saudi Arabia. This should continue to act as a tailwind for crude oil prices, stoking inflation fears and adding to bets of higher-for-longer US interest rates. According to the CME Group's FedWatch Tool, traders are pricing in around an 83% probability that the Fed will raise borrowing costs by the end of this year. The outlook, in turn, validates the near-term bullish USD undertone and warrants caution before placing aggressive bullish bets on the non-yielding Gold.
Meanwhile, the recent escalation of US-Iran tensions could further benefit the Greenback's reserve currency status and contribute to capping the precious metal. In fact, the US military has carried out a 10th consecutive night of attacks on Iran, with the White House saying the strikes will continue until President Donald Trump decides otherwise. Iran, on the other hand, said that it had launched retaliatory strikes at US military bases and allied infrastructure across the Gulf. This raises the risk of a broader regional conflict, which could lend additional support to the USD. Hence, it will be prudent to wait for strong follow-through buying before confirming that Gold has formed a near-term bottom and positioning for any meaningful appreciation in the absence of any relevant market-moving economic releases on Tuesday.
XAU/USD 4-hour chart
Gold bulls now await move beyond 50% Fibo. near $4,080
From a technical perspective, acceptance above the 23.6% Fibonacci retracement level of the downfall from the July swing high and a breakout through a short-term descending trendline favor the XAU/USD bulls. Adding to this, the Moving Average Convergence Divergence (MACD) and the Relative Strength Index (RSI) both lean positive, suggesting that bearish pressure is softening.
Despite the constructive setup, Gold keeps the near-term bias tilted bearish while below the 100-period simple moving average (SMA) on the 4-hour chart and a series of Fibonacci retracements. Hence, any subsequent move up is likely to confront an initial hurdle around the 38.2% Fibo. level at $4,052.78, followed by the 100-period SMA at $4,067.29 and the 50.0% retracement at $4,081.40.
The 61.8% level at $4,110.01 should act as a stronger barrier if bulls attempt a further recovery. On the downside, immediate support is seen at the 23.6% retracement and trendline break zone around $4,017, while a more substantial floor emerges at the Fibonacci anchor near $3,960.14, where sellers would likely pause if the current pullback resumes.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
